So for the past 24 hours or so I’ve been engaged in an effort to model the US economy based on the acknowledged debt (roughly $17 trillion) the unfunded liabilities of medicare, social security, etc. (somewhere between 60 and 100 trillion) and the expected growth of debt going into the future.
Doing this has caused me to get far more involved in investigating and analyzing our debt than I had ever bothered to do before. In a sense it has been a healthy exercise. I’ve been able to put aside my burning anger over the Health Care debacle and replace it with a desire to actually do something positive. The group I’m working with are tied into the economist blogosphere (folks like Megan McArdle, for instance) and they are going to try to get it to be a joint effort among some major economist bloggers. We’ll see how far it goes.
What I’m trying to do with the effort, insofar as I have any input (and they seem to be responsive to my suggestions so far) is figure out what is going to happen over the course of the next 20+ years as our unfunded liabilities are forced to become actual hard debt.
I don’t know how many people realize how the US government has been operating for the past fifty years, but it basically goes like this: When Social Security was passed, the social security tax was supposedly set up as a separate fund in the government, sort of like a savings account while the government still ran out of a checking account. But that was never actually done, instead the social security taxes were dumped right into what is called the “general fund” and government accountants simply kept books detailing how much social security tax had been collected.
Within a few years of social security being enacted, Congress began “borrowing” money from social security by submitting budget bills with provisions to pay social security back in some distant future. Of course that future never came, and eventually spending social security surplus taxes became business as usual. Of course every dollar taken from social security was a dollar that could not be paid out to a deserving social security recipient in the future, and that bill would inevitably become due when those people retired, so the pleasant fiction in Washington was that social security would be paid back at some point.
Well, due to the demographics of the baby boom generation, the longer lives of social security recipients and the reduced number of children entering the workforce, the social security surplus more or less officially ended this year, meaning that social security is now actually paying out more than it is taking in, which means the government can’t steal social security surpluses to pay for their boondoggles anymore.
Of course now that means social security will have to start paying out benefits that were supposedly collected years ago, along with interest. The estimate on what social security has to pay out is in the 35 – 40 trillion dollar range, if not higher (it’s hard to get an “official” figure because this whole issue is so charged with political partisanship even the economists won’t agree on what the real value is).
The reason this is so important is because up until now the government could pretend not to be adding to the debt, which is why the social security (and medicare) unfunded liabilities are not officially recorded as part of the “national debt”. The logic is that it’s not “hard” debt because it is money the US Government owes itself, as opposed to money the US Government owes to China or Warren Buffet.
But unless the government decides to end social security and medicare, the dollars being paid out are just as real as any other dollars.
So as our “hard debt” has been increasing over the decades, a large chunk of our spending has been insulated from that “hard debt” by raiding social security. Now we can’t do that any more. So now every dollar that we pay out in social security benefits over and above what is collected from social security taxes, will have to be added to the hard debt, along with every dollar that would in the past have been pulled from social security.
The end result is that our “hard debt” is about to start growing at several times the rate it has grown in the past.
At some point the debt/income ratio of a nation has an impact on their credit rating, just as it has an impact on corporations or individuals. We are already seeing the impact of this with the rates that the US is having to offer on treasury notes. As the debt goes up, the interest rate that lenders demand goes up because the risk of not being repaid goes up. The US is finding it harder already to sell treasury notes. At some point lenders will simply stop lending the US money. That’s what is happening to Greece right now, and is what lenders are threatening to do to California and some other states.
That’s the “tipping point” that will cause the whole house of cards (or Ponzi scheme, whatever you want to call it) to come crashing down.
So the model we are working on is an effort to find that tipping point and see what the US will have to do to avoid hitting it. There are four ways to avoid hitting that tipping point:
1. Grow Gross Domestic Product enough that the debt becomes manageable.
2. Inflate the currency so that the debt is counted in old dollars while the income is counted in inflated dollars. This is actually what Jimmy Carter and the Democrats were trying to do in the 70s, and it’s why “stagflation” became a new word in our vocabulary. It’s a pretty standard third world trick to reduce debt. The problem is that it crushes the middle class and leads to very unstable governments. Still, that’s what a lot of people think Obama is planning to do.
3. Raise taxes. The problem with this approach is that just to manage (not pay off, but just keep it from sinking us) the debt, taxes would likely have to go up by 50% or higher.
4. Stop spending. The problem with this is that the only real areas we can cut back spending to make a dent in the debt is in precisely those programs where the debt is being created, which are the social entitlement programs that nobody wants to touch.
This is a big reason I’ve been so vigorously opposed to Obamacare. People call social security and medicare the “third rails” of politics because you can’t touch them. They have to grow or the recipients of the entitlement will vote the government out of office and replace them with one that will keep the gravy train going. Now Obamacare has become a third “third rail” that cannot be touched, creating a third massive entitlement program at precisely the moment that the first two have clearly bankrupted us.
I will keep you posted on the results of the exercise, if it doesn’t descend into a screeching cat fight as the model starts showing people things they don’t want to believe.